Indonesia Mining Law Revision Boosts Local Governments Power

Photographer: Dadang Tri/Bloomberg

Excavators operate in the open pit coal mine at the PT Exploitasi Energi Indonesia operations in Asam-Asam, South Kalimantan, Indonesia. Close

Excavators operate in the open pit coal mine at the PT Exploitasi Energi Indonesia... Read More

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Photographer: Dadang Tri/Bloomberg

Excavators operate in the open pit coal mine at the PT Exploitasi Energi Indonesia operations in Asam-Asam, South Kalimantan, Indonesia.

Indonesia’s Constitutional Court granted greater power to local administrations to designate areas for mining by amending some articles in the 2009 Mining Law, according to a ruling announced yesterday.

The court revised article 6, point 1 of the law to state that local administrations must consult with the parliament in deciding areas for mining, Chief Judge Mohammad Mahfud said in Jakarta. The article had dictated mining areas be decided by the central government after coordination with local governments.

“To meet the democracy principles, local empowerment and regional autonomy, it is fair that the local government has the power” to decide mining areas, the ruling, obtained by Bloomberg News, reads. The current regulation “is insufficient to protect the constitutional rights and the regional authority in determining policy on the natural resources in the region, especially for minerals and coal.”

The ruling is the second success by local governments in seeking bigger benefits from abundant coal, nickel and copper resources, after the Supreme Court annulled some articles in Energy and Mineral Resources Minister Decree No. 7, which is the supporting rule for the mining law, including article 21 that bans exports of mineral ores.

“By decentralizing the licensing power, the number of decision makers will increase, coordination between parliament and regencies or provinces will likely become more difficult and time consuming,” Xavier Jean, Singapore-based associate director of corporate ratings at Standard & Poor’s, said by e- mail today. “This could potentially reactivate the uncertainty on the strength and quality of the mining licenses and concession areas, keeps the risk of litigation well alive.”

Supreme Court

The Supreme Court verdict, which was made public Nov. 5 by the Indonesian Chambers of Commerce and Industry, was based on a request from the Regencies Government Association, or Apkasi. Indonesia is the world’s largest exporter of tin and thermal coal and the biggest producer of mined nickel.

Yesterday’s decision was based on a request from Isran Noor, regent of East Kutai in East Kalimantan province, a coal producing region. Noor is also the chairman of Apkasi.

“That is exactly what we want, because we’re the ones who know exactly the resources in our region,” Noor told reporters at the court after the decision was read. “After this, we can resume issuing mining permits that were halted due to the judicial review.”

The Ministry of Energy and Mineral Resources will study the ruling, Susyanto, the ministry’s head of legal and public relations, said at the court.

“We will study the verdicts and consult with other ministries including the Law and Human Rights Ministry.”

BPMigas Dissolution

The Constitutional Court ruling came one week after the court dissolved the country’s oil and gas regulator BPMigas on the basis the agency’s role violated section 33 of the nation’s constitution, which states resources are held by the government.

Indonesia will see similar challenges to resources-related regulations in the future, because of successes with the mining and oil-and-gas laws, said Luke Devine, foreign legal consultant, finance and projects, at Hadiputranto, Hadinoto & Partners.

The court also ruled yesterday that Mining Business Areas, or Wilayah Usaha Pertambangan in the Indonesian language, will be designated by local governments, and signed off by the central government, a reversal of the previous regulation.

Further Skepticism

WUP’s are mining areas in which sufficient geological data have been produced on potential reserves. The ruling applies to mineral and coal areas. The local administrations have also been granted the power to set the acreage and boundaries of mining concession blocks known as Wilayah Ijin Usaha Pertambangan, or WIUP, in local language, also a reversal of the previous rule.

“The fact now that regional governments have been handed the power to determine the WIUP areas is likely to give rise to further skepticism from foreign majors,” Jakarta-based Hadiputranto, Hadinoto wrote in a note to clients today. “Regional governments may be tempted to divide up mining concessions into smaller areas so as to make them attractive to smaller local investors.”

To contact the reporters on this story: Yoga Rusmana in Jakarta at yrusmana@bloomberg.net; Eko Listiyorini in Jakarta at elistiyorini@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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